Why Tesla should partner with Fiat Chrysler

FCA CEO Sergio Marchionne has been on the lookout for partners and needs to play catch-up on electric vehicles.

Tesla is in trouble. The 15-year old automaker has never booked an annual profit and is now in the throes of what CEO Elon Musk has called “production hell” for the Model 3, a $US35,000-base-price car that’s supposed to eventually be produced in the millions, that’s currently rolling out in the low thousands.

On Wednesday, Tesla is expected to report that it has lost a huge amount of money in the first quarter – and spent a massive amount of cash.

Meanwhile, Fiat Chrysler Automobiles posted its own first-quarter earnings last week. It raked in over $US30 billion worldwide and made almost $US1.5 billion in North America alone. It was the latest in a long string of profitable quarters.

The contrast was vivid. But you wouldn’t know if you looked at Tesla and FCA’s financial value. Tesla has a market cap of around $US50 billion; FCA’s is $US35 billion. FCA shares are up 20% year-to-date, while Tesla’s are down 7% (and it was worse than that before a recent rally).

Makes no sense, right?

But out of this illogical arrangement, something interesting could develop.

A Tesla-FCA alliance

FCA CEO Sergio Marchionne has been trying, unsuccessfully, to merge FCA with another automaker, ahead of his 2019 retirement. He’s already spun off Ferrari in a very successful IPO. The M&A deal talk has died down since FCA has seen its business surge, but the automaker is still weak relative to its peers, with Jeep as its cash-cow brand and a debt load that while declining remains a drag.

Tesla is, by the numbers, just a few quarters away from bankruptcy, maybe a year if we’re generous. A few years back, it would have been hard to make the case that FCA should tie-up with Tesla, but FCA investors have seen the stock appreciate close to 300% since a 2014 IPO, with much of that coming after 2017.

FCA also ended 2017 with about $US13 billion in cash. It wouldn’t have to merge with Tesla; rather, it could contrive an alliance that would enable FCA to give Tesla the multiyear buffer it needs to concentrate on growing revenue and production without worrying about running out of money every 12 months. And FCA could provide Tesla with the manufacturing footprint and expertise the California carmaker badly needs.

Tesla could catapult FCA into the top ranks of EV purveyors – FCA hasn’t been slow to move into electrification, largely due to Marchionne justified scepticism about the market – and perhaps even provide a backdoor bailout for Tesla’s Autopilot technology, which isn’t advancing as fast as what existing FCA partner Waymo has achieved.

There’s a small chance of this happening. But crazy as it sounds, a business case can be made.